107
FINANCIAL STATEMENTS
The risk
Our response
Recoverability of Parent Company’s investment in subsidiaries
Forecast-based valuation The carrying amount of the parent company’s investments in subsidiaries are significant and at risk of irrecoverability as indicated by the reduction in the market capitalisation of the group. The financial statements (note 2) disclose this as an impairment trigger. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty in forecasting trading conditions and forecasting and discounting future cash flows used in the budgets. The effect of these matters is that, as part of our risk assessment, we determined that the carrying value of the cost of investment in subsidiaries has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The risk has increased compared to the prior year due to the decline in the Group’s share price which has led to a significant reduction in the market capitalisation of the Group.
Our procedures included: Benchmarking assumptions:
• Challenging the assumptions used in the cash flows included in the budgets and in determining the discount rate based on our knowledge of the Group and the markets in which the subsidiaries operate. Historical comparisons: • Assessing the reasonableness of the budgets by considering the historical accuracy of the previous forecasts; Our sector experience: • Evaluating the current level of trading, including identifying any indications of a downturn in activity, by examining the post year end management accounts and considering our knowledge of the Group and the market; and Assessing transparency: • Assessing the adequacy of the parent company’s disclosures in respect of the associated impairment. Our findings We found the Group’s assessment of the investment in subsidiaries to be balanced (2018: slightly optimistic) and the related disclosures to be proportionate (2018: proportionate).
(Parent specific risk) 2019: £1,863 million, 2018: £1,343 million)
The risk compared to the prior year has increased Refer to page 72 (Audit Committee report), page 160 (accounting policy) and pages 160 to 163 (financial disclosures)
We continue to perform procedures over the valuation of reinsurance assets and deposits received from Insurers. Previously, we noted that the Group needed to determine, based on the underlying cash flows and complex treaty terms, whether the deposits received from reinsurers should be accounted for as insurance contracts or as financial liabilities. We also noted that the valuations were sensitive to underlying assumptions. During the year, the Group has not amended the treaty terms that impact the accounting judgement and there are no new treaties to consider. The Group has amended certain treaty terms which reduce the subjectivity associated with underlying assumptions. We have not, therefore, assessed this as a Key Audit Matter in our current year audit and it is not separately identified in our report this year. In reaching our audit opinion on the financial statements we took into account the findings that we describe above and those for other, lower risk areas. Overall the findings from across the whole audit are that the financial statements use estimates within an acceptable range of outcomes, with the valuation of loans secured by residential mortgages at the optimistic end of the acceptable range. Considering the potential range of reasonable outcomes for individual estimates is greater than materiality for the financial statements as a whole, and possibly many times that amount, and considering the qualitative aspects of the financial statements as a whole we have not modified our opinion on the financial statements.
Powered by FlippingBook